2014 (3) TMI 966 - AT - Income Tax

Addition to income - including stock of bras rod/bar worth ₹ 14.45 lac to the stock physically verified at ₹ 1.77 crore as reduced by the amount of stock as per books of account at ₹ 1.54 crore and addition on account of surrendered stock at ₹ 30 lac - CIT(A) deleted the addition - Held that - We agree in principle with the view canvassed by the ld. CIT(A) that the stock of finished goods at the time of survey was required to be valued at cost, as it is only this value which would show the unexplained investment made by the assessee. The calculation done by the ld. CIT(A) in bringing the market value of finished goods down to its cost price, has not been controverted by the ld. DR. Thus, if we value the stock of finished goods at cost instead of market price taken by the survey team, the deletion of addition of ₹ 7,07,508/- is perfectly in order. - Decided against revenue. Rejection of estimation of sales - AO estimated figure of higher sale at ₹ 4.70 crore as against the declared sale of ₹ 4.59 crore for the reason that there was excess stock found during the course of survey - Held that - It is self evident that excess stock fortifies the inference of the assessee making unaccounted purchases. If there are certain unaccounted sales, the amount of stock on physical verification should be less to that extent. As it is a case of excess stock found on physical verification, there can be no inference that the assessee was making sales but not recording them in books of account. Moreover, there is no basis on which the sale has been estimated at ₹ 4.70 crore. We, therefore, uphold the action of the ld. CIT(A) in restricting the amount of sales at the declared level of ₹ 4.59 crore. - Decided against revenue. GP addition - CIT(A) limiting the addition of ₹ 30 lac surrendered on account of excess stock found during the survey, he held that net addition of ₹ 26.60 lac made on account of low G.P. was uncalled for and hence deleted - Held that - The entire premise of the action of the ld. CIT(A) in working out the figure of ₹ 58.68 lac is the incremental increase in the price of raw material. We are unable to appreciate as to how the corresponding increase in the sale price can be ignored or the meager figure of such increase in sale price can be accepted without proper verification. The ld. CIT(A) appears to have been more than charitable. The fact remains that the Assessing Officer made the addition by applying G.P rate of 11% on estimate basis as against the last year s G.P. rate of 12%, without specifically considering the effect of increase in the cost of raw material vis- -vis the resultant increase in the sale price of the products manufactured by the assessee to justify reduction in the G.P rate. In our considered opinion, the ends of justice would meet adequately if the impugned order on this issue is set aside and the matter is restored to the file of the AO for taking a fresh decision on this point in conformity with our above discussion as per law after allowing a reasonable opportunity of being heard to the assessee. We order accordingly. It is made clear that such determination of fresh gross profit by applying the correct G.P. rate on the declared sales of ₹ 4.59 crore will be in addition to the income of ₹ 30.00 lac surrendered on account of stock. - Decided in favour of revenue for statistical purposes. Disallowance of expenditure - CIT(A) allowed part relief - Held that - The disallowance was made on ad hoc basis without any specific reference to the amount disallowable. In our considered opinion, no exception can be taken to the view canvassed by the ld. CIT(A) in restricting the disallowance to ₹ 50,000/- towards some unsupported expenses. - Decided against revenue.

Summary

Issues:
1. Valuation of stock of finished goods.
2. Estimation of sales.
3. Addition on account of low gross profit.
4. Disallowance of expenses.

Valuation of Stock of Finished Goods:
The appeal by the Revenue concerns discrepancies found during a survey at the business premises of the assessee. The Assessing Officer made additions to the income based on these discrepancies. The CIT(A) deleted the addition of Rs. 7,07,508/- by valuing the stock of finished goods at cost instead of market price, as done by the survey team. The CIT(A) computed the profit element in the stock of finished goods at Rs. 7,67,174/- by applying the correct valuation method. The Tribunal agreed with the CIT(A) that the stock of finished goods should be valued at cost, leading to the deletion of the addition. Hence, the Tribunal disallowed the Revenue's appeal on this ground.

Estimation of Sales:
The Revenue challenged the rejection of the estimation of sales at Rs. 4.70 crore, insisting on the declared amount of Rs. 4.59 crore. The Assessing Officer estimated higher sales due to excess stock found during the survey. The Tribunal upheld the CIT(A)'s decision to maintain sales at the declared level, as there was no basis for the higher estimation. The excess stock did not necessarily indicate unaccounted sales. Therefore, the Tribunal rejected the Revenue's appeal on this issue.

Addition on Account of Low Gross Profit:
The Revenue contested the deletion of an addition of Rs. 26,60,000/- made by the Assessing Officer due to low gross profit. The CIT(A) considered the increase in raw material prices, concluding that the addition was unwarranted. The Tribunal disagreed with the CIT(A)'s approach, finding it overly lenient. The Tribunal set aside the order and directed a fresh decision by the Assessing Officer, considering the correct gross profit rate on declared sales. The Tribunal emphasized the need for proper verification and substantiation of any increase in sale prices. The Tribunal partially allowed the Revenue's appeal on this ground.

Disallowance of Expenses:
The Revenue appealed against the allowance of relief of Rs. 2,58,839/- towards expenses disallowed by the Assessing Officer. The CIT(A) restricted the disallowance to Rs. 50,000/- for unsupported expenses. The Tribunal upheld the CIT(A)'s decision, finding no fault in limiting the disallowance. Therefore, the Tribunal disallowed the Revenue's appeal on this issue.

In conclusion, the Tribunal partly allowed the Revenue's appeal for statistical purposes, addressing the issues related to the valuation of stock of finished goods, estimation of sales, addition on account of low gross profit, and disallowance of expenses. The Tribunal upheld certain decisions of the CIT(A) while directing a fresh decision by the Assessing Officer on the matter of low gross profit.